December 31, 2013

Raising the Minimum Wage Isn't Just Good Politics. It's Good Economics, Too.

The minimum-wage debate follows a predictable pattern any time it flares up in the media: Liberals say it’s a moral outrage that people can toil away at full-time jobs and still live in poverty. They nod at the overwhelming public support for raising the minimum wage as a way to shame reluctant politicians. Conservatives, for their part, insist that all the minimum-wage talk is just self-defeating do-gooder-ism: great for making Upper-West-Siders feel righteous, a lot less so for helping the people they claim to care about. In the real world, conservatives argue, raising the minimum wage costs jobs that the poor and young desperately need. At which point liberals mumble defensively and retreat to their original talking points, if they respond at all.

Monday’s New York Times piece on the renewed push for a minimum-wage increase is a handy case in point. The writers of the story—a nice, scoop-filled piece of reporting—talk about the issue’s potential to split Republican elites from the party’s voters, in classic wedge fashion. Intriguingly, they suggest it could goose turnout among young people and minorities, two Democratic-leaning groups that often vanish during midterm elections. And, of course, the story includes a de rigueur warning of doom and destruction from House Speaker John Boehner--“Why would we want to make it harder for small employers to hire people?”—which goes largely unanswered by anyone on the left.

Well, that’s no good. Yes, the politics of the issue sufficiently favor Democrats that they can ignore the GOP's economic argument—Republicans may resist, but that will only help Democrats on Election Day. But as White House adviser Dan Pfeiffer correctly points out to the Times, the hope isn’t just to retain a few Senate seats. It’s to improve people’s lives.

If they’re serious about doing that, Democrats can’t cede the intellectual fight. They have to expose the House GOP position for what it is—water-carrying for business, particularly the fast-food restaurateurs who are leading employers of minimum-wage workers and donate overwhelmingly to the GOP. Until that happens, Republicans will be able to hold out with a patina of respectability among mainstream journalists and commentators, who largely accept the GOP's job-killing claims.

When they engage at all on the job-market consequences of boosting the minimum wage, Democrats frequently cite a study by economists David Card and Alan Krueger1 from 1994, which looked at a (then) recent increase in New Jersey. After surveying over 400 similar restaurants in New Jersey and Pennsylvania, Card and Krueger found that the hike had no effect on jobs, contra the Cassandra-like freak-out from fast-food proprietors.

The paper was regarded as ground-breaking and, for its troubles, immediately got labeled “controversial” by the mainstream media thanks in part to persistent grumbling on the right. But in fact what made the paper so innovative wasn’t the conclusion per se, which other studies had arrived at. (For that matter, even when you tallied together all the studies that found a negative impact on employment, the effect that was very small. Recent studies have affirmed this.) What made it innovative was the methodology, which so cleanly tested the proposition. By comparing restaurants in New Jersey with restaurants just across the Delaware River in Pennsylvania, Card and Krueger were basically able to compare like with like, with the exception of the minimum wage law whose effects they sought to isolate.2 It was about as close to a laboratory experiment as you get in economics (other than, uh, these guys).

Even more relevant to the current discussion, however, was the rationale for why moderately raising the minimum wage wouldn’t kill jobs, as most of us might expect. After all, it’s one thing to look at a bunch of businesses and notice that they’re not cutting back. But unless there’s a compelling explanation for why our intuition on this is wrong, it’s hard to consider the study definitive. Even a study as well-designed as Card and Krueger’s could be flukish, or corrupted by hidden forces that aren’t evident to the authors or readers. Who knows, maybe McDonald’s managers in New Jersey are just unusually altruistic (though having patronized several fine Garden State dining establishments, I consider this to be extremely unlikely).

The bottom line is that backing the numbers with sound logical arguments is an important insurance policy against flukish-ness, and Card and Krueger identify a few. The first is that employers simply pass along the higher wages to customers rather cutting back on workers. And because the cost-increase tends to be small, and because customers accept the fairness of raising the minimum wage, they don’t buy fewer hamburgers or pizzas than before. As it happens, Card and Krueger found solid evidence that this was going on, as have many others.

Card and Krueger then nodded at a second, more interesting rationale, albeit one they buried deep in their paper. The idea is roughly as follows: A lot of companies have bargaining power when they hire employees—economists call these companies “monopsonists.” This means that, instead of hiring a burger-flipper at some going market rate (say, $10 per hour), they can throw their weight around and pay $9 or $8 per hour.

But here's the rub: Even an employer with a lot of weight to throw around will eventually run out of people who will accept $8 or $9. In order to add more workers at that point, he or she will have to woo them with a higher salary. More to the point, when the business owners get beyond that low-wage threshold and offer $10 an hour, they not only have to pay $10 for each new employee. They’ve got to bump up all their existing workers to $10 an hour, too. This turns out to be a bad deal for the owners. And so instead of hiring that $10-employee, they hire fewer employees than would be ideal so they can keep paying everyone $8 or $9.

What does this have to do with the minimum wage? Well, if you’re purposely scrimping on employees so that you don’t have to raise everyone’s wages to $10, and the government says you have to pay workers $10 whether you hire more people or not, then you’re probably going to hire more people. The only reason you weren’t was to keep wages down, and that’s no longer an option.

Before any conservative starts hyperventilating, it’s worth pointing out that this isn’t true of all industries, or even all employers in industries where it regularly happens. (In fact, Card and Krueger were skeptical of this story in their New Jersey study, before warming to a version of it in a subsequent book.) But this does happen a fair amount, and often in very pronounced ways.3 And the phenomenon goes a long way toward explaining why minimum wage laws frequently have so little net effect on jobs: If, in response to a minimum wage hike, some employers add a few workers while others cut back a bit, then it makes sense that the overall effect might hover around zero.

None of which is to say I expect the average Democratic pol to start lecturing minimum-wage denialists about monopsony employers any time soon. But if enough of us in the trenches band together and retake the intellectual high-ground, victory is likely to come a lot sooner.

I say this because even if the political resonance of the minimum wage issue helps Democrats wildly exceed expectations in 2014, they’re unlikely to retake the House. And, unfortunately, House Republicans have repeatedly showed they can hold out against public opinion for long stretches of time. What even they can’t do, however, is hold out against both public opinion and the received Beltway wisdom, as last fall’s shutdown fight demonstrated. The way to force Republicans to cave when public opinion won’t do the trick is to deprive them of any pretension to seriousness.

Noam Scheiber is a senior editor at The New Republic. Follow @noamscheiber.

1

Krueger was the chairman of Barack Obama’s Council of Economic Advisers until earlier this year.

2

The paper was challenged by other economists using other data sets, but the result ultimately held up.

3

Economists have more recently refined this argument into something called a “dynamic monopsony model,” which applies even more broadly—even in industries where firms don’t have a ton of market power. But the basic logic is the same.